Debt Zombie Haleynomics: Britain’s Buffett vs the Austrian Austerian
Let’s unpack Haley’s bundle of economic and historical illiteracy one step at a time. We’ll examine the post WWII history of US national debt, the controlled experiments in US economic and financial market history, tax policy and zombie debt fantasies and the numbers on which states and regions generate the biggest share of the national debt.
The Long History of Zombie Ideas on Debt: It’s the Denominator, Stupid
British Tory then American conservative alarmists like Haley have been braying about the phantom debt trap for 2 1/2 centuries, starting with conservatives’ founding troll, counter French revolutionary Edmund Burke, who said he’d rather be ruled by the Turk than the debt Britain was running up. Britain’s rapid post-Napoleonic growth and Alexander Hamilton’s copy of “Dutch Finance” — the US treasury bond market — proved Burke spectacularly wrong on both sides of the Atlantic. Britain’s debt/GDP ratio in 1815 was 225% and Britain kept issuing century term Consols (bonds) with 3–4% coupons. Result? Debt/GDP ratio dropped all through the high growth 19th century. Reason? To paraphrase James Carville’s “it’s the economy, stupid” Clinton campaign slogan, it’s the denominator, stupid. Britain’s growth rate was far higher than the debt service. The debt was incurred for public investment in infrastructure, public education and public health, not consumption.
The same “it’s the denominator, stupid” principle applies to the US. In 1944 the federal deficit was 44% of GDP. Yes, 44% of GDP in a single year and a national debt/GDP ratio that peaked at nearly 120%. Where did the money go? Not just mass producing planes, tanks, ships and other military hardware the Germans and Japanese would destroy on both the western and eastern fronts, which our then fully employed Rosie the Riveter workforce would have to produce all over again. It went into the Manhattan Project, which yielded the technological spinoffs that created nuclear medicine, the computer and nuclear power industries (https://www.princeton.edu/news/2014/02/27/beyond-bomb-atomic-research-changed-medicine-biology).
Without the public investment in technology during WWII and postwar investment in education through the GI Bill, which my war veteran father benefited from, the productivity-driven postwar boom would never have happened. After WWII the US pivoted from a wholly military Keynesian economics to a hybrid military-civilian Keynesian economics that deployed public investment to create whole new industries that risk-averse private capital wouldn’t. Keynes’ opponent, the Austrian Frederich von Hayek predicted a debt and unemployment-driven depression for the postwar period. Keynes, by dying soon after participating in the Bretton Woods conference that made the debt-ridden dollar the world’s reserve currency, predicted politicians’ imprisonment by zombie economic ideas:
“Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back”
Britain’s Buffett vs Freddie the Austrian Austerian
Haley’s problem? She’s been zombie-brained by the defunct Hayek, the worst economic forecaster of the 20th century, who totally missed the onset of the 30 year postwar boom because of a more than two century old zombie debt fixation that views public investment as “The Road to Serfdom” instead of the way out of the plutocrats’ plantation. Keynes, on the other hand, was the best investor of his generation of 1921–46, racking up 12% compounded annual returns managing the Chest Fund, the Oxbridge endowment:
Which “defunct economist” would you put your money on to guide policy, Britain’s Buffett or Freddie the Austrian Austerian? The question answers itself with the foregoing chart. And the debate’s a wrap after watching the Keynes vs Hayek rap: https://www.youtube.com/watch?v=d0nERTFo-Sk&t=87s . Wrap up the rap debate with a controlled experiment, 1929–33 vs 1933–37, and then crash 2.0 in 1937–38.
Mellon’s Liquidationist Austerity vs Roosevelt’s Reflation, then FDR’s Brake Tap
The US economy was subjected to an unintended three stage controlled experiment from 1929–1938. After the stock market crash of October 1929 the Federal Reserve’s high real interest rates + the Smoot Hawley Tariff Act turned a normal downturn into a full blown depression with mass bank and business failures and skyrocketing unemployment at over 25% in 1932. The Dow, which had peaked at 387 in August 1929, bottomed out at 41 in July 1932. An anti-interventionist free market fundamentalist President Hoover followed the advice of his treasury secretary, Andrew Mellon: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.”
Franklin Roosevelt came to power five weeks after Adolf Hitler in Germany on March 4, 1933 and reversed the previous three years’ austerity with deficit spending on public works that directly hired millions of the unemployed, dollar devaluation, ban on the private ownership of gold and New Deal regulation of financial markets, bank deposit insurance and social security. The New Deal replaced collapsed private demand triggered by what Keynes and 1714’s Fable of the Bees (https://en.wikipedia.org/wiki/The_Fable_of_the_Bees) called the paradox of thrift, in which the cumulative effect of private saving due to a cutback in credit triggers a financial collapse that helps nobody. We’ve known for three centuries that what’s logical behavior for the individual produces a macroeconomic disaster.
Then, worried about budget deficits and under political pressure from a “capital strike” by big business, Roosevelt tapped on the fiscal brakes in the spring of 1937 despite a federal deficit that never exceeded 3% of GDP. By this time economic output had returned to its peak 1929 levels, though with much higher unemployment. FDR’s turn toward austerity crashed the stock market 55%, raised unemployment from 14.3% to 19% and manufacturing output dropped 37%. Full recovery from the recession of 1937–38 came only with the ramp up of the wartime “arsenal of democracy” economy and military draft in 1940.
Despite the austerian trip-up recession of 1937–38, the return on investment from New Deal public investment was often astronomical. Before the TVA’s (Tennessee Valley Authority’s) rural electrification projects, average income was $168/year in 1933, 44% of the US average, and many subsisted on less than $100/year:
“In Union County, Tennessee (near where the TVA built Norris Dam, its first project, 1933–36), for instance, there were no electrical utilities in 1926, crude birth rates were more than double the national average, and migration out of the area was heavy. Only 1 percent of farm owners had indoor plumbing, 4 percent telephones, and 8 percent radios.”
The TVA built hydro-electric infrastructure where risk-averse private capital wouldn’t and produced macroeconomic returns private capital never matched. By 1953 average income in the TVA region was 61% of the national average of $2449 ($1494, 9x the region’s 1933 average income level) and “by 1946 provided electricity to 668,752 households. The new city of Oak Ridge, part of the important Manhattan Project which reached a high of 80,000 workers by 1945, was located in Anderson County, Tennessee, in part because of the availability of abundant electric power.” (https://tennesseeencyclopedia.net/entries/tennessee-valley-authority/#:~:text=By%201953%20per%20capita%20income,much%2Dneeded%20injection%20of%20money.)
This controlled economic and fiscal policy experiment, in which civilian and military Keynesianism overlapped, proves one thing beyond doubt: a capitalist economy not fully recovered from a credit and purchasing power collapse cannot sustain the removal of demand supplied by public investment. FDR understood as much as said so in a fireside chat:
“responding to the urgings of the converts to Keynesian economics and others in his Administration, Roosevelt embarked on an antidote to the depression, reluctantly abandoning his efforts to balance the budget and launching a $5 billion spending program in the spring of 1938, an effort to increase mass purchasing power. Roosevelt explained his program in a fireside chat in which he told the American people that it was up to the government to “create an economic upturn” by making “additions to the purchasing power of the nation”. (https://en.wikipedia.org/wiki/Recession_of_1937%E2%80%931938#:~:text=The%20recession%20of%201937%E2%80%931938,regained%20their%20early%201929%20levels.&text=Industrial%20production%20declined%20almost%2030,durable%20goods%20fell%20even%20faster.)
The paradox of thrift mandated an everybody wins or nobody wins fiscal policy. We had Hayek from 1929–33, Keynesian recovery from collapse from March 1933 to mid 1937, a Hayek-induced recession within a partial recovery from the Great Depression in 1937–38 and renewed Keynesian deficit-financed public investment after mid 1938. Score: Keynes 3, Hayek 0. Freddie, 3 strikes and you’re out.
Which Party Ran Up the Debt?
Until they crashed the economy in late 2008, Republicans had run up 85% of the national debt since 1945. This illustrates Dick Cheney’s aphorism that Reagan proved that deficits don’t matter (https://www.chicagotribune.com/news/ct-xpm-2004-01-12-0401120168-story.html). Here’s the chart showing Republicans’ dominance in the debt-generation game:
Collectively, Democratic presidents from 1945–2009 lowered the US debt to GDP ratio by 75% from its end of WWII peak debt to GDP ratio of nearly 120%. Collectively, Republican presidents raised the US debt to GDP ratio by 42.4% of GDP. Eisenhower accepted Roosevelt’s New Deal, left high corporate and top marginal personal income tax rates in place (91% at the peak) and lowered the US debt to GDP ratio by 16.2%. Kennedy and Johnson did the same and the US debt to GDP ratio dropped by 16.6% despite the ramp up in military spending due to the Vietnam War. “We’re all Keynesians now” Nixon lowered the ratio by 2.8%, and Carter about the same, 3.3%. Then the ratio exploded upward by 20.6% under the Reagan revolution’s debt-driven growth, which Bush the Elder continued, adding 13.3% to the US debt to GDP ratio and $1.483 trillion to the national debt. Clinton added almost the same amount to the national debt, but proved “it’s the denominator, stupid”, dropping the debt to GDP ratio by 9.7%. Nothing beats a tech bubble’s capital gains’ tax cascade into the treasury for lowering the debt to GDP ratio. Since all those tech companies never paid a dime in royalties for the DARPA-developed internet and all the other military tech they used, like GPS and cell phones, this is only fair (https://www.mauldineconomics.com/editorial/george-friedman-high-tech-is-born-in-war-not-silicon-valley ).
Which States Ran Up the Debt?
Conservatives always talk about mismanaged blue cities and states too generous with social welfare and public employee pensions. While there are undoubtedly public pension disaster stories like Illinois, let’s examine who the real welfare cases are. The chart below shows which states are net contributors to the federal budget and which are the net takers. It’s crystal clear that it’s the low tax, low service red states that are the federal welfare cases, with, surprise, surprise, Nikki Haley’s South Carolina as federal welfare champion, receiving nearly $8 for every $ its citizens pay in federal income taxes:
“If you look only at the first measure — how much the federal government spends per person in each state compared with the amount its citizens pay in federal income taxes — other states stand out, particularly South Carolina: The Palmetto State receives $7.87 back from Washington for every $1 its citizens pay in federal tax. This bar chart, made from WalletHub’s data, reveals the sharp discrepancies among states on that measure.”
If Nikki Haley wants a reckoning with debt, she should start at home, in South Carolina, also a net taker/welfare case regularly rated the country’s worst or near worst in public education, public health and other empirically-based quality of life measures. Hover your cursor over the county by county dependency map to see where the real takers are concentrated: https://www.socialexplorer.com/c0213d14ea/view : in the former confederate states. Business Insider said it best:
“Who really benefits from government spending? If you listen to Rush Limbaugh, you might think it was those blue states, packed with damn hippie socialist liberals, sipping their lattes and providing free abortions for bored, horny teenagers. …As it turns out, it is red states that are overwhelmingly the Welfare Queen States. Yes, that’s right. Red States — the ones governed by folks who think government is too big and spending needs to be cut — are a net drain on the economy, taking in more federal spending than they pay out in federal taxes. They talk a good game, but stick Blue States with the bill.”
Here’s how: 9 of the 11 states most dependent on SNAP (food stamps) are red southern states, with Haley’s South Carolina #10:
Next Zombie Idea: Taxing the Rich Hurts Growth, Tax Cuts Juice Growth
Haley says we can’t pay down the debt by taxing the rich alone. Actually we can with a wealth tax or a financial transaction tax (the Tobin Tax). Will Michael Lewis’ Flashboy high frequency traders stop trading and making money if all of them are subject to the exact same tax rate that gives none a competitive advantage? Nope. Will forex traders at Citigroup or Goldman stop risking their employers’ money for big bonuses just because the banks are all subject to the same transaction tax? No, because the playing field and the search for the alpha (market-beating returns) their clients demand will be as level as before.
Haley voiced no objection to raising the national debt with the Trump tax cuts of 2017, the bulk of whose benefits went to the highest earners:
- The top 1% of taxpayers (income over $732,800) would receive 8% of the benefit in 2018, 25% in 2025, and 83% in 2027.
- The top 5% (income over $307,900) would receive 43% of the benefit in 2018, 47% in 2025, and 99% in 2027. https://en.wikipedia.org/wiki/Tax_Cuts_and_Jobs_Act_of_2017#:~:text=Distribution%20of%20benefits%20during%202018,receive%2017%25%20of%20the%20benefit.
“A Bloomberg analysis found that about 60 percent of tax cut gains will go to shareholders, compared to 15 percent for employees. A Morgan Stanley survey found that analysts estimate 43 percent of tax cut savings will go to stock buybacks and dividends, while 13 percent will go to pay raises, bonuses, and employee benefits. Just Capital’s analysis of 121 Russell 1000 companies found that 57 percent of tax savings will go to shareholders, compared to 20 percent directed to job creation and capital investment and 6 percent to workers….What’s more, the richest 10 percent of Americans own 80 percent of all stock shares. The bottom 80 percent of earners own just 8 percent. (https://www.vox.com/policy-and-politics/2018/3/22/17144870/stock-buybacks-republican-tax-cuts )
As a shareholder I’m not happy about a trickle almost nothing-down tax cut that enables managements to overpay for their companies’ own stock to juice their bonuses at the peak of a credit cycle. Across the board corporate tax cuts are a blunt instrument that exacerbates this classic principal-agent and corporate governance problem because of their herding behavior — they’re incapable of contrarian fear when others are greedy and vice-versa — and long history of mistimed share buybacks and ego-driven mergers (but now we’re digressing into my behavioral investing course).
Warren Buffett says he never considers tax rates when valuing an investment. I’m an early stage investor in seven startups and never once considered tax rates when evaluating an investment or a team. Never, ever. Period.
Hate Warren’s wealth tax? Try this alternative that turns back the pitchforks while reducing inequality in an incentive-based format: index the investor class’ tax rates to the Gini coefficient measure of inequality: https://medium.com/@ljgolden55/how-to-stop-the-plutocracy-game-index-the-top-1-s-tax-rates-to-decreasing-inequality-a3a19f42cd97
Indexing tax rates to the Gini Coefficient is the best off-ramp on the fiscal highway to hell the top 1% are otherwise driving on. As Obama said to the bankers in 2009, “it’s either me or the pitchforks”. Or try the Italian version: “if you don’t leave us enough crumbs, you don’t get to eat the cake.”
The only way out of the deflationary or stagflationary vicious we’re in: kill zombie austerity and trickle-down economic ideas that have never worked. This brief history of the Hayek and Haley zombie debt obsessions, the US national debt, who created it and who contributes most to it, may detach at least some of you from fiscal mythology and get you in touch with fiscal and financial reality as history shows it to have worked. If you disagree, please say so, but with historical examples that prove Freddie right and JMK wrong.